: BUS 251 Quarterly service fee recognition analysis

Task 1: Quarterly service fee recognition analysis Issue  OHB capitalized and depreciated the quarterly fees paid for the maintenance and cleanliness of the oxygen machines. The issue here is whether capitalizing these fees is the correct accounting treatment. Analysis  As per ASPE 3061, costs incurred to enhance the service potential of capital assets are considered betterments. For a fee to be qualified as a betterment, it must meet the following conditions: 1) the physical output or service capacity is increased 2) costs have been lowered 3) useful life has been extended 4) the quality of output is improved The fees paid to the third party is only for cleanliness and continuous functionality of the machines. The service potential is maintained; however, it is not enhanced. Recommendation  As per the analysis, the monthly service fees for the oxygen machines represents a repairs and maintenance expense and cannot be classified as a betterment. Therefore, these fees cannot be capitalized. The fees capitalized must be reversed and expensed, along with the depreciation should also be reversed. Task 2: Financial statement impact related to service fee recognition